Employee rights for shares – a poor trade off - LITRG Press Release

Published on 5 December 2012

The Autumn Statement announced that the government will proceed with a scheme whereby employees may forfeit certain employment rights in exchange for shares in their employer company. Those shares will be exempt from capital gains tax (CGT) but may still result in an immediate income tax and NIC liability. LITRG feels that this plan is misguided, particularly if it is offered to employees at the lower end of the income scale.

Following a short consultation run by the Department for Business, Innovation and Skills in October and early November, the Chancellor has confirmed that the government will be introducing a new ‘employee-owner status’ for workers choosing to trade certain employment rights for shares in their employer company.

There are risks that the scheme will be over-complex, still create tax liabilities and put employees at risk for little or no real reward. There is also a risk of confusion with existing employee share schemes: elsewhere in the Chancellor’s statement he gave welcome confirmation that a number of improvements to the SAYE and other schemes are to go ahead.

LITRG’s Technical Director, Robin Williamson, referring to the group’s response to the consultation on this measure, said:

“This measure encourages employees to relinquish rights which are certain and set out in law in return for an uncertain gain in a speculative investment. It is crucial that employees fully understand the consequences and risks of their choice, but we fear that they are unlikely to do so and may be pressurised into these arrangements.

“Although the main supposed benefit of the scheme is that the shares offered in the employing company will be free of capital gains tax, for many low-income workers the trade-off of certain rights will not be worthwhile because most people never use their CGT annual exemption in any event. It is pleasing to see that the Chancellor has committed to looking at the income tax and NIC status of these shares. This is a much more important issue: awards to ordinary employees need to be free of income tax and NICs.”